Long-term Debt had expanded from $3 billion as recently as September 2007 to more than $9 billion earlier this year. PepsiCo used the some of the funds obtained from the added debt for acquisitions and share repurchases.

In a prudent step, the debt has recently been trimmed to $7.4 billion. When combined with an increased Shareholders' Equity, now $15.3 billion, the Long-Term Debt to Equity ratio is much lower than it was 6 months ago.

Debt may, however, resume an upward trajectory when the company completes its bottler acquisitions.

Changes in the amount of Inventory on hand can signal improving or worsening business conditions. In this case, Inventory at the end of the third quarter was lower (a good thing) than at the end of the second quarter. This is expected because PepsiCo always builds up inventory in the spring to meet the rising demand for cool beverages and snacks in the summer. However, the increase in Inventory over the last 12 months (to eliminate seasonal factors) as a percentage of Cost of Goods Sold suggests that sales have been softer than the company had anticipated.

The increase in Days of Sales Outstanding might be hinting that the company is giving its suppliers easier payment terms to stimulate slack demand.

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Revenue and Net Income were both less in the last 12 months than in the previous year. An erstwhile strengthening of the dollar exacerbated declines caused by the weak economy and restructuring activities.

Operating Expenses as a percentage of Revenue had been rising, but the expense ratio seems now to be edging back down towards a more normal value.

Higher expenses have sapped some strength from the ROIC and the Free Cash Flow return on capital. The recent improvements in these two ratios helped the gauge score modestly in the current quarter.

The big drop in the Accrual Ratio (lower is better) may be the best news, as it suggests improved earnings quality. Simply stated, more of the company's Net Income was due to Cash Flow from Operations. Since Cash Flow was reduced earlier this year for the pension contribution, the decline in the Accrual Ratio is especially encouraging.

Although PepsiCo's 12-week "quarter" ended on 5 September, the ratios in the Value table above were calculated using the respective month-end share prices.

During the July-to-September period, the price per share increased from $54.96 to $58.66. This rise shaved a couple points off the most recent Value gauge score. However, current valuation ratios are, in the whole, more appealing now than they were 12 months ago.

We often see the Value gauge leading the Overall score higher. However, in this case, the three other category gauges all rose while the Value gauge gave back a couple of points.

The 50-point Overall gauge score is the highest we have calculated for PepsiCo. Please remember that it was calculated using a $58.66 share price, and the shares are now trading a bit over $60. (We don't make trading recommendations, but we would wait to see if the price settles down before adding to a position.)

Disclosure

This blog describes and gives examples of a particular quantitative methodology, relying on published financial statements, to analyze businesses. The methodology does not evaluate every aspect of a company's finances or operations. Other analytical techniques may be better suited to some evaluations, depending on the type of business or the goals of the analysis. The material in the blog is not investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have, might once have had, or might be considering a position in the companies mentioned. Specific positions will not be disclosed. While good-faith efforts are made to use reliable information sources and to provide accurate analytical results, accuracy is not guaranteed. All results are subject to change without notification. Application of the analytical methodology described in this blog requires that various assumptions be made. The assumptions are generally not disclosed and are subject to error, invalidating some or all of the analysis results. In looking for trends, recent financial data is compared to historical financial data; however, underlying differences in the assumptions or presentation of the data might degrade or invalidate these comparisons and could produce erroneous or misleading results. Readers should independently validate any information in this blog that causes them to consider making or not making a financial transaction.